FHA & VA Mortgages Are Assumable






One of the benefits that's often overlooked when describing VA home loans and FHA mortgages, is that they are assumable.  What this means is that a buyer can "take over the payments over" from a seller, if the existing loan is a FHA mortgage or VA home loan. 

Why would anyone care if a loan is assumable?
Today, a VA home loan rate will be around 4.5%.  In a matter of years, rates will naturally go up as they always do.  Chances are that rates will not stay at historically low levels forever. With inflation, rates could drive rates back into the double digits. The good news is that home prices will probably jump up as well.
How hard will it be to sell a house in five years, with mortgage rates at 10%?

Pretty tough…unless you can offer the buyer a below market interest rate.  Let's assume a Californian buys a $300,000 home today and finances $306,000 with a 5% VA home loan.  His payment will be $1,642.

That same veteran looks to sell that home, in 2014, for $400,000 but VA home loan rates are at 10%.  The new buyer, looking to finance $408,000 at the market rate of 10%, would have a payment of $3580. That's over twice the original payment.

What would happen if the selling veteran held a $100,000 second mortgage, for 25 years, at 12%, and allowed the buying veteran to assume his 5% VA home loan?

The payment on the second mortgage would be $1,053. Add the (now) 25-year, original VA home loan, at 5% payment of $1,642 and you have a financing package that is about $900 cheaper than a $408,000 VA home loan.

Now, here comes the bad news:

VA home loans are only assumable to other veterans (that limits the market).  Technically, any deed transfer would trigger a due-on-sale clause causing the original VA loan to be called.  Pragmatically, that doesn't happen.

Unless the original loan is formally assumed, with VA approval, the selling veteran will have his VA home loan eligibility tied up.

Even with a formal assumption, the selling veteran is still responsible for the original loan payments for the first five years.  You had better be certain that the buyer is credit-worthy.

The seller is stuck with a note, not cash.  That note could be sold on the secondary market but prices are typically about 70 cents on the dollar; that could cost the seller some $30,000 in profit.

The same rules apply for an FHA mortgage, too (except that neither the buyer nor seller needs to be a veteran).

On balance, the assumption of a VA home loan or FHA mortgage could be an excellent selling feature.  Low prices and historically-low mortgage rates make these loans a consideration when comparing them to a conventional loan.